The Centre for European Reform is a think-tank devoted to improving the quality of the debate on the European Union. It is a forum for people with ideas from Britain and across the continent to discuss the many political, economic and social challenges facing Europe. It seeks to work with similar bodies in other European countries, North America and elsewhere in the world.

Thursday, December 20, 2012

The European Investment Bank (EIB) is greener than it used to be – it now lends half its annual energy pot to energy efficiency and renewables. But it is still lending to coal projects. This is inconsistent with EU climate policies, and must stop now.

Some leading politicians, such as UK Chancellor of the Exchequer George Osborne, are arguing that, given the continuing economic crisis, we cannot afford to ‘go green’ at the moment. This is a serious mistake. Climate change is not only an environmental problem; it is already causing death and want. A recent report on vulnerability to the effects of climate change (http://daraint.org/climate-vulnerability-monitor/climate-vulnerability-monitor-2012/) found that climate change is already killing nearly 400,000 people annually world-wide each year. And it is already costing the global economy €930 billion each year.

The EU’s 2011 Energy Roadmap, a document laying out the Union’s aspirations that was backed by all member-states bar Poland, proposes the need for an 80 per cent reduction in carbon emissions by 2050. New coal-fired power stations would make it impossible to meet this target, since they emit high levels of carbon dioxide, the main greenhouse gas. Taking account of the full life-cycle (including construction and decommissioning), coal plants emit around twice the amount of carbon dioxide per unit of electricity generated as gas plants do, eight times as much as nuclear plants and 32 times as much as wind farms.

Since 2007, the EIB has lent a total of €1.88 billion to three coal projects in Slovenia, three in Poland, two in Germany and one each in Romania, Italy and Greece. It is true that the EIB does take climate change into account when making investment decisions, to some extent. Its rule is that the new plant has to replace an existing coal or lignite plant and lead to a decrease of at least 20 per cent in emissions, compared to the old plant. It also has to be ‘carbon capture ready’, so that if carbon capture and storage (CCS) proves to be effective at scale and affordable, it can be retrofitted to the plant. But that remains a very big ‘if’, and the EU’s failure so far to award any money to a CCS demonstration does not bode well for rapid progress. In practice, the requirement that a plant be carbon capture ready means little more than ensuring that a patch of land suitable for a CCS plant is left free near the new power station.

Carbon emissions, like all form of pollution, have externalities. The EU has a scheme to force the producers of the pollution to pay – the Emissions Trading System. But the price under this system is languishing below €8/tonne. This is far too low to have any impact on investment decisions. To its credit, the EIB uses instead what it calls an ‘economic price of carbon’. This is a calculation of the full costs to society of dealing with each tonne of carbon emitted, and is currently set at €30/tonne. This will increase €1 every year from now on.

However, this does not prevent the EIB from lending to coal projects without CCS. So the economic price sounds a good policy instrument, but does not actually stop the EIB from lending to projects that they think will be financially profitable. This lending amounts to a massive subsidy to coal, which undermines the renewables target.

The EIB currently takes decisions on energy projects based on the guidelines in its 2006 energy policy document. But it is consulting on a new approach, which it aims to adopt next year. The science and understanding of climate change have moved on considerably since 2006, and the situation is much more urgent. A minimum of 2 degrees of warming now looks all but inevitable – driven largely by the burning of coal. The top priority for the EIB’s new policy must be to stop lending to all coal and lignite plants unless they have CCS. Without this change, the EIB will continue to undermine the EU’s climate policies.